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For New Zealand financial advisers. A high level review of the use of different remuneration models, including variations in upfront and renewal, fee, pro-bono work in the provision of advice on risk and insurance purchase.

1.
OUTLINE OF IFA GUIDED DISCUSSION
ON THE USE OF COMMISSION MODELS
Russell Hutchinson, Warwick Walker and Alan Rafe
11 June 2015

2.
Agenda
1. Introduction by session host
2. General introduction to the session by Russell Hutchinson
3. Alan Rafe to discuss the choices from product selection perspective
4. Warwick Walker to discuss the choices from a practitioner
perspective
5. Questions
6. Wrap up comment from each of us

3.
Learning Outcomes
1. Understand the differences between the remuneration options
available
2. Consider a model of the different components of work in an advice
business
3. Understand the value of each model in different aspects of the
business
4. Review the differences between commissionable and non-
commissionable products
5. Explore a working model of a hybrid fee and commission approach
to remuneration

5.
What is the Work?
A brief look at the components of the advice business:
• Manual work - very low 
• Marketing work - not every client buys
• Knowledge work - Large and rising, with a broader market,
more features, and more complexity, and
compliance
• Emotional work - Large and rising, risk advisers have to
help people confront death and disability
• Risk - Risks due to advice failures are rising
due to compliance
• Remuneration should be tied to work done, and most of the work
done is at outset (certain) and less is at renewal, some at claim (but
not everyone claims).

6.
Comparison of Commission Systems
• 94% Persistency
• $100k New ARI
• $300k Inforce
• 50/50 Mix of GST and Non-GST
• In a group
• Excludes Health only
• Just the major offer to third party
advisers
0%
20%
40%
60%
80%
100%
120%
Comparison of Commission Systems

7.
Advantages of Maximising Upfront,
Disadvantage of a Low Renewal
• Maximising upfront commission leaves a renewal commission in
the range of 5% to 17% with 7.5% to 10% being typical
• Remuneration should be tied to work done.
• Most of the work done is at outset (certain)
• Less work is at renewal,
• Some at claim (but not everyone claims)
• But not all work is actually connected with the implementation of a
new policy
• Business establishment requires effort, and therefore capital
• Business maintenance and a quality advice business also
requires effort

8.
Advantages of Maximising Renewal,
Disadvantage of a Low Upfront
• Maximising renewal, say by selecting a ‘true’ level option at, say
25% (not available from all insurers) would reduce upfront to
25% also
• Giving up half the upfront to move from 5% to 20% looks
attractive, Giving up a further 75% to move only from 20% to
25% or 30% does not look so attractive
• Remuneration should be tied to work done
• Advice work versus product sold – there is a difference
• What superior ongoing service are you providing?
• The security of the promise to pay the higher renewal in the
future is crucial

9.
Fee Only
• Few advisers select this option
• Very few clients like this option too – some advisers have experienced
preparing plans for $1,000 fee, only to have the client decline to pay
the bill and implement the business with a commission-based adviser
• The problem of implementation remains:
 Some will not implement, often leaving the client to “pay twice”
 Some repay commission (agency agreements notwithstanding)
 Some will implement at nil commission – but charge a separate
fee for that

10.
Value of Incorporating Commission
and Fee for Service
• Some activities are hard to undertake on commission
 Reviewing a claim for a client served by another adviser
 Picking up a review where you know there is little chance of
winning the business
 Administrative assistance during restructuring
• Some are easy to undertake on fee
• A fee option is useful to offer
• Increasingly being taken up
• Establishes an hourly rate or fee for advice proposition for work in the
future

18.
Context
1. Time between now and leaving industry
2. Market
3. What else you advise on
4. Your view of where industry is going
5. What you believe regulators will do
6. What is the product providers agenda?
7. Who are opposition and what they are doing?